How risky is risky?

I have had a long term discussion with Richard about the merits of introducing specialist funds into a low risk portfolio such as the Saltydog Tugboat portfolio. Specialist funds by their designation can be considered likely to have a more volatile performance than funds selected further down the risk chain from the “Steady as she Goes” group (UK Income funds) or the “Full Steam ahead Developed “group (UK small companies). His argument is that one should have a positive definitive financial gain when selecting such a fund. My approach is that there should be the opportunity to carry a small percentage of such a rogue fund. One that perhaps does not follow the rules, but has the future potential to fly.

An example of such a fund is the “AXA Farmington Biotech” fund. This is one that I have carried on and off in my personal portfolio for the last three years. It is investing into companies which are working towards the future well -being of the world`s population-both in the development of drugs and also in medical technology, so this really ticks my interest box. However, following the Tugboat rules it would be ruled out for inclusion when compared with say “Miton UK Small Companies.” Here are the numbers…….

Fund 3years 2years 1year 6 months 3 months 1 month 1 week
Fram.Biotech 160% 80% 66% 25% 20% 9% 7%
Miton UK sml N/A 72% 57% 44% 18% 1.5% 2.5%

With the power of hind-sight one might very well feel aggrieved if one had failed to invest in Framlington Biotech three years ago. That is of course assuming that you had heard of the fund.(It comes up regularly in the SDI numbers) However, the last six months have seen it trail the Miton UK small companies fund, only surging to the front in the last month. It is all a matter of where you want to start your timescale. It is a definite case of Lies, Damned Lies and Statistics. Here you can make the numbers support either case. Richard is probably correct with his argument, as the Tugboat Portfolio is aimed to be ultra cautious. But “hey- ho,” both funds are giving great returns and you readers of Saltydog numbers know about them, which is more than can be said for the bulk of the investing population.

The importance of a balanced risk portfolio

The Saltydog cautious Tugboat portfolio was set up with the target of achieving around about a 10% annual return. In the three and a quarter years that it has been operating it has done exactly that and at the same time it has avoided the four stock market setbacks that took place during this period. This demonstrates three important principles. Firstly, that the portfolio should have a balanced fund risk constitution. Secondly, that in times of market stress, going into cash is a sensible alternative to staying invested and taking the pain. Finally, you can only achieve the first two if you have a constant up-to-date supply of fund performance information from which to make your decisions.

The Tugboat has recently made full use of the two funds “CF Odey Absolute return” and “City Financial UK Equity” which are both from the Targeted Absolutebalanced-riskj Return IMA sector and from the SDI low risk “Slow Ahead” group. These have been well balanced with a variety of funds from within the slightly more risky UK Income and UK small companies IMA sectors which fall into the SDI “Steady as she Goes” and “Full steam ahead Developed” groups. When the markets have turned down then the Targeted Absolute funds have stood their ground and when the markets have gone ahead then the UK Income and UK small companies have produced substantial gains. As a result of this informed activity the portfolio has made continuous progress even whilst the markets have been volatile.

This surely must be a perfect demonstration and justification for a DIY revolution. Private investors with the fund performance numbers must take over the management of their own ISAs and SIPPs. It is totally impractable for an IFA to give this detailed attention to a client`s portfolio and even if he was to attempt this exercise, the costs to the investor would be prohibitive. “The times they are a-changing.”

Thorium

thorium_1010-mdLast week there was a fascinating article in the magazine “The Week” on the subject of the material Thorium. The article was entitled “The metal that could save the world”. Thorium is a first rate nuclear fuel that is as common in the Earth`s crust as tin, mercury and silver. It was discovered in 1828 by the Swedish chemist Jon Jacob Berzelius and he named it after the Norse god Thor. The Nobel prize- winning physicist Carlo Rubbia estimates that one ton of Thorium will deliver as much energy as 200 tons of Uranium and 3500 tons of Coal.

Not only is Thorium far more energy productive than Uranium, it is also safer and easier to use. The problems at Chernobyl and Fukushima would have been greatly alleviated if Thorium had been the fuel source instead of Uranium – also the Thorium waste is much easier to dispose of safely. The former U.N. weapons inspector Hans Blix said “I am told that Thorium will be safer in reactors and it is almost impossible to make a bomb using Thorium. These are very major factors as the world looks for future energy supplies.” There would not appear to be any major technical problems in the development of nuclear reactors designed to use Thorium as their fuel source. In fact at the Oak Ridge National laboratory in the 1960s a reactor was designed and ran successfully until 1976 when it was closed down after its patron Alvin Weinberg was fired. Today both India and China are developing their twenty first century nuclear energy reactors using Thorium as their fuel source.

To me this all seems to point to the Western world being led by the nose by the Political Hawks and the Arms Industry which are undoubtedly linked.  In the past, countless billions of dollars have been ploughed into uranium-based research for both energy and more importantly weapons. In the words of Mr Blix, Uranium has a very deep furrow, backed by vested interests. It is said by some, that Thorium was rejected in favour of Uranium because it was too “Safe”. If this is true, what a sad indictment of the human race. We had available, in abundance, a safe fuel that could resolve the energy needs and thereby the food and water requirements of the world. Yet the people in power chose for reasons of global domination and personal gain to risk the future safety of the earth and use Uranium. This selfish decision condemned many people in the developing nations to a life of hardship and poverty.